F&I Management & Training

So the Bank of England has decided to give its metaphorical printing presses a rest: the Monetary Policy Committee said today that it’s calling a halt to Quantitative Easing (the process by which it basically pumps money into the economy) after various indicators suggested that the UK might finally be in recovery, of sorts. However, the Bank – which also left interest rates at 0.5%, much to nobody’s surprise – did reserve the right to start it up again further down the line, if things take a turn for the worse. Perhaps by then the economists will have reached some kind of consensus about whether QE actually works…

‘On balance, the Committee believes that the prospect is for a gradual recovery in the level of activity,’ the Bank said today, in a typically gung-ho statement. ‘The recession has probably impaired the supply capacity of the economy, but the scale and persistence of the fall in output means that a substantial margin of under-utilised resources is likely to remain for some time to come.’ In other words (we think), it’ll be a while before the UK is operating at full steam again.

Since the Bank finished spending its latest bit of the QE money last week, the MPC’s decision today was seen as a good indicator of how healthy it thinks the economy currently is. But as we’ve seen, the picture is mixed. Although official figures showed the economy moved out of recession last quarter, it was only by a measly rounding-error-esque 0.1% - some economists reckon that may yet be revised upwards, but either way, it’s hardly a firm indicator of recovery. Meanwhile good news from the manufacturing sector and the housing market has been counterbalanced by rotten news from the service sector. And inflation seems to be heading further and further north of the Bank’s 2% target. So today’s decision – which basically amount to an ‘as-you-were’/ ‘wait-and-see’ approach – was probably to be expected.

But has QE worked? Well, the jury still appears to be out on that one, not least (as Bank deputy governor Charlie Bean has pointed out) because we don’t know what would have happened without it. The National Institute of Economic and Social Research is in favour – the think-tank reckons the Bank's scheme boosted output by 0.5 per cent last year, and will contribute another 1% this year – but others are less convinced. So although the Bank’s unlikely to withdraw its support any time soon, with the economy still on a knife-edge, we still have no idea what will happen when it does...

DATED: 04.02.10

FEED: MgmT